ratio analysis - ashokleyland sudheer

A STUDY ON RATIO ANALYSIS

INTRODUCTION

Finance is the life blood of an organization. Without finance nothing is possible. It is impossible

to imagine the operation of an advanced industrial society without money. In order to function

the organs of the business concern properly, it should be sufficient to meet the liabilities.

So I have taken up a study on the financial performance of “Ashok Leyland limited”, as a part

of our curriculum activity, since we have gathered data mostly from the annual reports of the

“Ashok Leyland limited”. In total five consecutive annual reports have been analyzed for this

purpose from the year 2008-2012. The study is made mainly by analyzing few ratios for the

given five years.

The success of any business operations depends upon the manner by which its financial analysis

was done. This study was conducted to ascertain the financial information.

A financial statement contains summarized information of the firm’s financial affairs organized

systematically. It is used to present the firm’s financial situation to the users. As these statements

are used by financial analysts to examine the firm’s performance in order to make investment

decisions.

Financial statements are prepared from the accounting records maintained by the firm,

inadequacy of working capital will lead to business failure. In business profitability and adequate

liquidity are very essential.

Management accounting & financial accounting provides necessary information to assist the

management in the creation of the policy and in day to day operations. It enables the

management to discharge all its functions of planning, organizing, staffing, directing and

controlling efficiently with the help accounting information. With the background view the

RAO’S INSTITUTE OF MANAGEMENT STUDIES


present study has been under taken for a proper insight into the “Financial analysis” in “ Ashok

Leyland limited”.

NEED FOR THE STUDY:

1. The study has great significance and provides benefits to various parties who directly or

indirectly interact with the company.

2. It is beneficial to the management of the company by providing crystal clear picture

regarding important aspects like liquidity, leverage, activity profitability.

3. The study is also beneficial to employees and offers motivation by showing how actively

they are contributing for company’s growth.

4. The investors who are interested in investing in the company’s shares will also get

benefited by going through the study and can easily take a decision whether to invest or

not to invest in the company’s shares.

SCOPE OF THE STUDY:

The study is confined to the financial performance of the ASHOK LEYLAND .This study aims

at analyzing with help of tools of the financial performance of the company that are:

Ratio analysis

Comparative statement

Ratio analysis is the process of computing, determining and presenting the relationship

of the items. A financial ratio expresses the relationship between two accounting figures.



Comparative financial statements are those statements, which have been designed in a

way so as to provide time perspective to consider various elements of financial position

embodied in such statements.

OBJECTIVES

The major objectives of the recent study are to know about Financial strengths and weakness of

ASHOK LEYLAND through the RATIO ANALYSIS.

The main objectives of recent study is aimed as:

1) To evaluate the performance of the company by using ratios as a yardstick to measure the

efficiency of the company.

2) To understand the liquidity, profitability and efficiency positions of the company during

the study period.

3) To evaluate and analyze various facts of the financial performance of the company.

4) To make comparisons between the ratios during different periods.

5) To offer appropriate suggestions for the better performance of the organization

6) To analyze the capital structure of the company with the help of Leverage ratio.



RESEARCH METHODOLOGY:

Research methodology is the way to systematically solve the research problem .it

may be understand as a science of studying how research is done scientifically.

This involves exploring all possible methods of solving the research problem examine the

alternative methods one by one and arriving at the best possible method considering the

resources at the disposal of the researcher.

The information is collected through secondary sources during the project. This

information was utilized for calculating performance evaluation and based on that,

interpretations were made.

Sources of secondary data:

1. Most of the calculations are made on the financial statements of the company provided.

2.some of the information regarding theoretical aspects were collected from reference books.

3. Method- to assess the performance of the company,method of Observation was followed in

finance department as follows.

AREA COVERED

It covers the financial function of the ASHOK LEYLAND limited.

PERIOD COVERED



The study covers the five years period from 2007 to 2011 to have a

comprehensive picture.

The study suggests the measures for the maximization of the profit in ASHOK LEYLAND

Limited.

LIMITATIONS OF THE STUDY

No primary data is used for study.

The study has been limited i.e, (2007 -2011).

All ratio could not be covered under the study, because of inadequate information.

Opinions of the managers of the organization were taken into consideration. Hence there

is a chance for personal bias.

The study provides an insight into the financial, personnel, marketing and other aspects

of ASHOK LEYLAND. Every study will be bound with certain limitations.

One of the factors of the study was lack of availability of ample information. Most of the

information has been kept confidential.



INDUSTRY PROFILE

The automobile industry in India is the tenth largest in the world with an annual production of

approximately 2 million units – is expected to become one of the major global automotive

industries in the coming years. A number of domestic companies produce automobiles in India

and the growing presences of multinational investment, too has led to an increase in overall

growth following the economic reforms of 1991 the Indian growth as a result of increased

competiveness and relaxed restrictions.

History:

In 1953, the Govt of India and the Indian private sector initiated manufacturing processes to

help develop the automobile industry, which had emerged by the 1940‟s in a nascent form.

Between 1940 to the economic liberalization of 1991, the automobile industry continued to grow

at a slow pace due to the many govt restrictions. Japanese manufacturers entered the Indian

market ultimately leading to the establishment of Maruti udyog. A number of foreign firms joint

ventures with Indian companies.

AUTOMOBILE INDUSTRY HISTORY:

In the year 1769, a French engineer by the name of Nicolas J. Cugnot invented the

first automobile to run on roads.

This automobile, in fact, was a self-powered, three wheeler, military tractor that

made use of steam engine. The range of the automobile, however, was very brief and at the

most, it could only run at a stretch for fifteen minutes. In addition, these automobiles were



not fit for the roads as the steam engines made them very heavy and large, and required

ample starting time. Oliver Evans was the first to design a steam engine driven automobile

in the U.S.

The automobile industry finally came of age with Henry Ford in 1914 for the bulk

production in cars. This lead to the development of the industry and it first begun in the

assembly lines of his car factory. The several methods adopted by Ford, made the new

invention i.e.) car, popular amongst the rich as well as masses.

According to the history of automobile industry U.S, dominated the automobile

markets around the globe with no notable competitors. However, after the end of Second

World War in 1945, the automobile industry of other technologically advanced nations such

as Japan and certain European nations gained momentum and within a very short period,

beginning in the early 1980s, the U.S automobile industry was flooded with foreign

automobile companies, especially those of Japan and Germany.

The current trends of the Global automobile industry reveal that in the

developed countries the automobile industry are stagnating as a result of the drooping car

markets, whereas the automobile industry in the developing nations, such as India and

Brazil, have been consistently registering higher growth rates every passing year for their

flourishing automobile markets.

INDIAN AUTOMOBILE INDUSTRY:

India is one of the fastest growing automobile industries in the world. After 1960,

the automobile industry saw rapid growth and many automotive manufacturers started

production

The automobile industry in India is the seventh largest in the world with and annual

production of over 2.6 million units in 2009. In 2009, India emerged as Asia’s fourth largest

exporter of automobiles, behind Japan, South Korea and Thailand. By 2050, the country is



expected to top the world in car volumes with approximately 611 million vehicles on the

nation’s roads.

A well developed transport network indicates a well developed economy. For rapid

development a well-developed and well-knit transportation system is essential. As India’s

transport network is developing at a fast pace, Indian automobile industry is growing too.

Also, the automobile industry has strong backward and forward linkages and hence provides

employment to a large section of the population. Thus the role of automobile industry cannot

be overlooked in the Indian economy. Indian automobile industry includes manufacture of

trucks, buses, passenger cars, defence vehicles, two wheelers etc.., the industry can be

broadly divided into the car manufacturing, two-wheeler manufacturing and heavy vehicle

manufacturing units.

The major car manufacturers are Hindustan Motors, Maruti Udyog, Fiat India Pvt.

Ltd, Ford India Ltd., General Motors Pvt. Ltd., Honda Siel Cars India Ltd., Hyundai Motors

India Ltd., Skoda India Pvt. Ltd., Toyota Kirloskar Motor Ltd., to name a few.

The two wheeler manufacturing is dominated by companies like TVS, Honda

Motorcycle &Scooter India Pvt. Ltd., Hero Honda, Yamaha, Bajaj etc..,

The heavy motors like buses, trucks, defence vehicles, auto rickshaws and other

multi utility vehicles are manufactured by Tata-Telco, Ashok Leyland, Eicher Motors, Bajaj,

Mahindra and Mahindra etc..,

INDIAN AUTOMOBILE MARKET:

Many foreign companies have been investing in the Indian automobile market in

various ways such as technology transfers, joint ventures, strategic alliances, exports and

financial collaborations. The auto market in India can boast of attractive finance schemes,

increasing purchase power and launch of latest products. Some vital statistics regarding the

automobile market in India has been mentioned below:



India ranks 2nd in the global two-wheeler market

India is the 4th biggest commercial vehicle market in the world

India ranks 11th in the international passenger car market

India ranks 5th pertaining to the number of bus and truck sold in the world.

HEAVY VEHICLES MARKET:

Heavy vehicles market in India comprises of trucks, machines, ambulances and

school buses. The popular heavy vehicle brands in India are Volvo, Eicher, Tata, Telco,

Ashok Leyland and Swaraj Mazda.

Following are the major players in the Indian Heavy Vehicles Market:

Tata Motors is the largest automobile manufacturing company in India that

manufactures a wide range of heavy vehicles adhering to world class standards. It is the

market leader in commercial vehicles in all the segments, be it heavy vehicles, medium size

vehicles, small vehicles, buses or defence vehicles. The heavy vehicles manufactured by

Tata Motors have highly developed braking structure, high ground authorization, better

direction competence and a muscular body. The advanced engine imparted to these heavy

vehicles makes them a class apart from the other heavy vehicles running on the Indian roads

and Highways. Tata Motors leads this segment with a market share of 61%.

Ashok Leyland is an exclusively heavy vehicle manufacturing company situated in

Chennai and was initiated in the year 1948. It is one of India’s biggest producers of heavy

vehicles such as trucks, buses, military vehicles and also the second biggest commercial

vehicle firm in India heavy vehicle division with a market share of around 27%. Ashok



Leyland is also renowned for producing auto spare parts and engines for marine and

industrial submission.

Eicher Motors was initiated in 3rd September, 1960. The first firm to manufacture the

first tractor in India. The indigenously manufactured tractor was introduced in the Indian

market straight from Eicher’s Faridabad factory. The history of the firm can be traced back

to 1948, when Good earth Company was established for vending and repairs of imported

tractors in the nation.

Swaraj Mazda, a tie up between Mazda and Swaraj Enterprise, Swaraj Mazda represents

advanced Indian expertise and manufacturing. The firm has Research and Development

improvement edge on international scale. The firm manufactures various products such as

Bus, Ambulance, Trucks etc.

The modern automobile market in India has been considering key issues in the process of

growth:

Customer care, and not just service

Domestic as well as multi-national investments

Searing through cut-throat competition

Road safety

Anti-pollution norms

Co-ordination with government to enable advancement

Used vehicle trade

The future of Indian automobile market is bright as it looks forward to manufacturing and

implementing new innovations such as electric cars as provided by Reva, alternate fuels like

CNG and LPG and probably customized internet automobile orders.



COMPANY PROFILE

Ashok Leyland has been a major presence in India’s commercial vehicle industry since

1948, the year it was born. The origin of Ashok Leyland can be traced to the urge for self-

reliance, felt by independent India. Pandit Jawaharlal Nehru, India's first Prime Minister

persuaded Mr. Raghunandan Saran, an industrialist, to enter automotive manufacturing.

They are one of the India’s leading manufacturers of commercial vehicles and special

vehicles, engines for industrial purpose, gen sets and marine requirement equipments. For

over five decades, Ashok Leyland has been the technology leader in India’s commercial

vehicle industry, molding the country’s commercial vehicle profile by introducing

technologies and product ideas that have gone on to become industry norms.

Ashok Leyland at the time of its inception was known as Ashok Motors. It was

assembling Austin cars at the first plant, at Ennore, near Chennai. In 1950, the company

started assembly of Leyland commercial vehicles and soon the local manufacturing under

license from British Leyland; participation in the equity capital, in 1954, the company was

re christened Ashok Leyland.

In 1987 the overseas holding by LRLIH (LAND ROVER LEYLAND

INTERNATIONAL HOLDINGS LIMITED) was taken over by a joint venture between the

Hinduja group, the Non Resident Indian Transnational group and IVECO Fiat SPA part of

the Fiat group and Europe’s leading truck manufacturing company. Ashok P.Hinduja is the

chairman of the company. The Hinduja group also associated with Ennore Foundries

Limited, Automotive Coaches and Components Limited, and Gulf Ashley Motors Limited.



The subsidiary holdings are Ashley Holdings Ltd., Ashley Investment Ltd., and

Ashok Leyland Project Services. The chief competitors of the company are;

Mahindra

Volvo

Tata Motors

With a commanding strength of the about 12,000 employees the company is looking

forwards to enhance the scope of its action. It is aiming at expanding its production

operation overseas to make it a more globally accessible company. It is looking to acquire a

small to medium sized commercial vehicle manufacturers in China and other developing

nations, which have an established product line. An example would be the 2007 acquisition

of the Czech based Avia’s truck business rechristened Avia Ashok Leyland Motors.

Since its inception, Ashok Leyland has been a major presence and these years have

been punctuated by a number of technological innovations which went to become industry

standard. This tradition of technological innovations and leadership was achieved through

years of vigorous in-house research and development.

From 18 seater to 82 seater double-decker buses, from 7.5 tons to 49 tone in

haulage vehicles, from numerous special application vehicles to diesel engines for industrial,

marine and genset applications, Ashok Leyland offers a wide range of products.

Ashok Leyland has seven manufacturing plants –

Ennore Plant, Chennai.

Hosur Plants Unit I, Unit II and Unit II A.

Alwar, Rajasthan.

Bhandara, Maharashtra.

Pantnagar, Uttarakhand



Early products of Ashok Leyland included the Leyland Comet bus chassis sold to many

operators including Hyderabad Road Transport, Ahmedabad Municipality, Travancore State

Transport, Bombay State Transport and Delhi Road Transport Authority.

In the popular metro cities, four out of five state transport undertaking buses come from

Ashok Leyland. Some of them like the Double Decker and Vestibule buses are unique

models from Ashok Leyland, tailor made high-density routes.

Statistics reveal that the company is India’s largest exporter of medium and heavy duty

trucks. It sells close to 83,000 medium and heavy vehicles each year. The company has a

near 98.5% market share in the Marine Diesel engine markets in India. At 60 million

passengers a day, Ashok Leyland buses carry more people than the entire Indian Railway

network.

The Five AL Values are:

1. International

2. Speedy

3. Value Creator

4. Innovative

5. Ethical

GROWTH MILESTONES OF ASHOK LEYLAND:

1966 – Full air brakes introduced

1967 – Double Decker buses introduced.

1968 – Power steering offered.

1979 – Multi-axle trucks introduced.



1980 – Integral bus with air suspension.

1992 – Self-certification status for defence supplies.

1994 – ISO 9001 Certification

1997 – India’s first CNG powered bus.

1998 – QS 9000 Certification

1999 – CNG (Compressed Natural Gas) introduced.

2000 – Euro-I, Engines/vehicles introduced.

2002 – ISO 14000 Environment Management System Certification.

2002 – Exclusive Machine line – 2 for Hino cylinder.

2003 – E-Comet launched.

2004 – 50,000 mark vehicle produced.

2006- ISO/TS 16949 Corporate Certification.

ASSOCIATE COMPANIES:

Automotive Coaches & Components Ltd (ACCL)

Lanka Ashok Leyland

Hinduja Foundries

IRIZAR – TVS

Ashok Leyland Project Services Ltd

Gulf Ashley Motors Ltd

Ennore Foundries Ltd

FACILITIES:

The company has seven manufacturing locations in India



1) Ennore, Tamilnadu

2) Hosur: Unit 1, Tamilnadu

3) Hosur: Unit 2, Tamilnadu

4) Hosur: Unit 2A, Tamilnadu

5) Alwar, Rajasthan

6) Bhandara, Maharashtra

7) Pantnagar, Uttarakhand

Ashok Leyland’s Technical Centre, at Vellivoyalchavadi in the outskirts of

Chennai, is a state-of-the-art product development facility, that apart from modern test

tracks and component test labs, also houses India’s one and only Six Poster testing

equipment.

The company has an Engine Research and Development facility in Hosur.

The new plant in the North Indian state of Uttarakhand at Patnanagar is set up at an

investment outlay of Rs.1200 crores. This plant is expected to go on stream in the year 2010

to cater mainly to the North Indian market taking advantage of the excise duty and other tax

concessions. The facilities have been so designed as to accommodate further expansion in

terms of capacity and future models. At full capacity utilization, 75000 vehicles will roll out

of the Patnanagar plant.

The company has signed an agreement with Ras Al Khaimah Investment

Authority (RAKIA) in UAE for setting up a bus body building unit in the Middle east.

CLIENTS (Not exhaustive):

Indian Army.

US Army.

Honduras Armed Forces (HAF).

Tamilnadu State Transport Corporation (TNSTC).

Metropolitan Transport Corporation (MTC), Chennai.



State Express Transport Corporation (SETC), Tamilnadu.

Kerala State Road Transport Corporation.

Maharashtra State Road Transport Corporation (MSRTC).

Andhra Pradesh State Road Transport Corporation (APSRTC).

Parveen Travels.

Sharma Transport.

VISION

Achieving leadership in the medium/heavy duty segments of the domestic

commercial vehicle market and a significant presence in the world market through transport

solutions that best anticipate customer needs, with the highest value -to-cost ratio.

MISSION

-Identifying with the customer.

-Being the lowest cost manufacturer.

-Global benchmarking our products, processes and people, against the best in the

Industry.

QUALITY POLICY

Ashok Leyland is committed to achieve customer satisfaction by anticipating and

delivering superior value to the customer in relation to their own business, through the

products and services offered by the company and comply with statutory requirements.

Towards this, the quality policy of Ashok Leyland is to make continual

improvements in the processes that constitute the quality management system, to make them



more robust and to enhance their effectiveness and efficiency in achieving stated objectives

leading to

1. Superior products manufactured as also services offered by the company.

2. Maximum use of employee’s potential to contribute to quality and environment by

Progressive up gradation of their knowledge and skills as appropriate to their

functions.

3. Seamless involvement from suppliers and dealers in the mission of the company

to address customers changing needs and protection of the environment

ORGANIZATION STRUCTURE OF M/s. ASHOK

LEYLAND LTD.

(AUTHORITY FLOW)


MANAGING DIRECTOR

WHOLE TIME

EXECUTIVE DIRECTOR

GENERAL MANAGER

ASST.GENERAL MANAGER

SPECIAL DIRECTOR

DIVISIONAL MANAGER

SENIOR MANAGER

DEPUTY GENERAL MANAGER


PRODUCT PROFILE

Ashok Leyland offers a comprehensive product range with trucks from

7.5 tons GVW to 49 tons GVW (Gross Vehicle Weight). From 19 to 80 seaters in passenger

transport, a host of special application vehicles and diesel engines for industrial gensets and

marine application. Product profile can be broadly split into five categories viz. Buses,

Trucks, defence vehicles, special Vehicles and Engines.

BUSES

LYNX BS-II Viking BS-II 12 M Bus-BS II

Cheetah (Front engine) Viking BS-III Viking AL

Airport Tarmac Coach Vestibule Bus Panther (Rear engine)

Cruiser Viking CNG BS-III Falcon (Front engine)

Stag BS-II Double decker

TRUCKS

4x2 Haulage models Ecomet


MANAGER

DEPUTY MANAGER

ASST.MANAGER

SENIOR OFFICER

OFFICER


4x2 and Multi-axle Tipper Tractor

Multi Axle vehicles

DEFENCE VEHICLES

Short Chassis Bus Field artillery tractor Comet 4x4

Topchi field Artillery tractor Long Chassis Bus

Stallion 6x6 Stallion truck fire fighting

SPECIAL VEHICLES

Hippo tractor Stallion Mk III Tipper Hippo Tipper

Beaver tractor Rapid Intervention Vehicle

Beaver Haulage Hippo Haulage



ENNORE PLANT:

Ashok Leyland has six manufacturing plants - the mother plant at Ennore near Chennai, two

plants at Hosur (called Hosur I and Hosur II, along with a Press shop), the assembling plants at

Alwar and Bhandara. The total covered space at these six plants exceeds 450,000 sq m and

together employees over 11,500 personnel.

Spread over 135 acres, Ashok Leyland Ennore is a highly integrated Mother

Plant accounting for over 40% ALL production. The plant manufactures a wide range of vehicles

and house production facilities for important aggregates such as Engines, Gear Box, Axles and

other key in-house components. Number of employees in ennore plant are 4146 and number of

models manufactured are 132. Ashok Leyland is the flagship company of the hinduja group and

is the second largest manufacturer of commercial vehicles in India.

RAO’S INSTITUTE OF MANAGEMENT STUDIIES


Ashok motor was set up in 1948 for the assembly of Austin cars. The company name and

objective changed with equity participation by British Leyland and Ashok Leyland commenced

manufacturer of commercial vehicles in 1955. It has since than grown as a reputed manufacturer

of quality automotive products ranging from light commercial vehicles to heavy duty vehicles

and for automotive, industrial and marine applications. In 1987, the overseas hold by Land Rover

Leyland International Holidays Ltd(LRLIH) was taken over by a joint venture between the

Hinduja group, Non-Resident Indian Transitional group and IVECO (since July 2006,the

Hinduja group is 100% stake holder of LRLIH). Ashok Leyland also acquired truck business unit

of Avia, Prague (Czech Republic effective 19-10-06).

The products of the company are of proven design for durability and

reliability and are hence very popular both in Indian and overseas markets. In recent years the

product range is upgraded in to the latest technological development in the world, for which the

company has the technical support from IVECO (FIAT group), Italy for manufacture of

IVECO cargo range of vehicles; Hino Motors, Japan for manufacture of fuel efficient engines;

and ZF , Germany for manufacture of synchromesh gear boxes.

In the journey towards the Global standard of Quality , Ashok Leyland

has reached a major milestone in 1993 , when it became the first in India‟s automobile industry

to win ISO 9002 Certification. The more comprehensive ISO 9001 certification came in 1994,

QS 9000 in 1998 and ISO 14001 certification for all vehicle manufacturing units in 2002. It has

also become the first Indian automobile company to receive the latest ISO/TS 16949 corporate

certification which is specific to the auto company.

The company has the corporate office register at Chennai.

The marketing headquarter is at Chennai and the sales and services network, dealer network and

spare parts warehouse spread throughout India with regional sales office and services centre

located in all major cities and towns in the country. The products are also exported to a range of

overseas countries



The marketing personal maintain constant interaction with customers for application

development and feedback for continuous improvement of the products. The services function is

carried out by qualified personal whose skills are continuously upgraded through training to meet

the servicing requirements of newer or improved products. The design function is carried out by

the product Development Division operating through 4 centres viz. Product Development

(Ennore) for R&D related to Ashok Leyland engines, Technical centre vellivoyalchavadi for

design, proto-type developments of vehicle, vehicles and components testing; Engine R&D

(Hosur) for design and development of Hino engines and Advanced Engineering (Chennai) for

research related to future products.



The manufacturing units of the company are located at Ennore (TN), Hosur (TN), Alwar

(Rajasthan) and Bhandara (MR). The Ennore , Hosur (plant - 1), Hosur (plant-ii), Ambattur ,

Alwar and Bhandara manufacturing units are certified ISO 9001:2000 and QS 9000:1998

certification by Indian register Quality system.

The company is also certified to ISO 14001:2000 – Environmental Management System for all

the manufacturing units.

The Bhandara unit of the company has won the “Golden Peacock Environmental Award

2002” of the world Environmental Foundation in the “Large/manufacturing “category.

Ashok Leyland is also the 1st auto mobile company to receive the ISO/TS

16949 corporate certification in June 2006. TS 16949 reckon the nuances of automobile Industry

and is more customer centric. It integrates the salient concepts of all the QMS standards has been

accepted recognized and followed by all automobiles manufactures in USA , Europe and Asia.



Ashok Leyland has also obtained ISO 27001 certificates for its Ennore Data

canter and Advanced Engineering group located in Chennai. Ennore data centre obtained the

certificate in May 2005 and advanced engineering in April 2007.

RATIO ANALYSIS

FINANCIAL ANALYSIS

Financial analysis is the process of identifying the financial strengths and

weaknesses of the firm and establishing relationship between the items of the balance sheet and

profit & loss account.

Financial ratio analysis is the calculation and comparison of ratios, which are

derived from the information in a company’s financial statements. The level and historical trends

of these ratios can be used to make inferences about a company’s financial condition, its

operations and attractiveness as an investment. The information in the statements is used by

• Trade creditors, to identify the firm’s ability to meet their claims i.e.

Liquidity position of the company.

• Investors, to know about the present and future profitability of the

Company and its financial structure.

• Management, in every aspect of the financial analysis. It is the responsibility of the

management to maintain sound financial condition in the company.



RATIO ANALYSIS

The term “Ratio” refers to the numerical and quantitative relationship between two

items or variables. This relationship can be exposed as

• Percentages

• Fractions

• Proportion of number

Ratio analysis is defined as the systematic use of the ratio to interpret the financial

statements So that the strengths and weaknesses of a firm, as well as its historical performance

and current financial condition can be determined. Ratio reflects a quantitative relationship helps

to form a quantitative judgment.

STEPS IN RATIO ANALYSIS

• The first task of the financial analysis is to select the information Relevant to the

decision under consideration from the statements and Calculates appropriate ratios.

• To compare the calculated ratios with the ratios of the same firm relating to the pas6t or with

the industry ratios. It facilitates in assessing success or failure of the firm.

• Third step is to interpretation, drawing of inferences and report Writing conclusions are

drawn after comparison in the shape of report or recommended courses of action.



BASIS OR STANDARDS OF COMPARISON

Ratios are relative figures reflecting the relation between variables. They enable

analyst to draw conclusions regarding financial operations. They use of ratios as a tool of

financial analysis involves the comparison with related facts. This is the basis of ratio analysis.

The basis of ratio analysis is of four types.

• Past ratios, calculated from past financial statements of the firm.

• Competitor’s ratio, of the some most progressive and successful competitor firm at the same

point of time.

• Projected ratios, ratios of the future developed from the projected or

Perform financial statements

NATURE OF RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of financial statements.

It is the process of establishing and interpreting various ratios for helping in making certain

decisions. It is only a means of understanding of financial strengths and weaknesses of a firm.

There are a number of ratios which can be calculated from the information given in the financial

statements, but the analyst has to select the appropriate data and calculate only a few appropriate

ratios. The following are the four steps involved in the ratio analysis.

• Selection of relevant data from the financial statements depending

Upon the objective of the analysis.

• Calculation of appropriate ratios from the above data.



• Comparison of the calculated ratios with the ratios of the same firm in the past, or the ratios

developed from projected financial statements or the ratios of some other firms or the

comparison with ratios of the industry to which the firm belong

INTERPRETATION OF THE RATIOS

The interpretation of ratios is an important factor. The inherent limitations of ratio

analysis should be kept in mind while interpreting them. The impact of factors such as price level

changes, change in accounting policies, window dressing etc., should also be kept in mind when

attempting to interpret ratios. The interpretation of ratios can be made in the following ways.

- Single absolute ratio

- Group of ratios,

-Historical comparison,

-projected ratios,

-inter-firm comparison,

GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS

The calculation of ratios may not be a difficult task but their use is not easy.

Following guidelines or factors may be kept in mind while interpreting various ratios are

• Accuracy of financial statements

• Objective or purpose of analysis

• Selection of ratios

• Use of standards

• Caliber of the analysis



IMPORTANCE OF RATIO ANALYSIS:

• Aid to measure general efficiency and solvency position

• Aid in forecasting and planning

• Facilitate decision making

• Aid in intra and inter-firm comparison

• Act as a good communication

• Evaluation of efficiency

• Effective tool

LIMITATIONS OF RATIO ANALYSIS

• Differences in definitions

• Limitations of accounting records

• Lack of proper standards

• No allowances for price level changes

• Changes in accounting procedures

• Quantitative factors are ignored

• Limited use of single ratio



CLASSIFICATIONS OF RATIOS:

`

The use of ratio analysis is not confined to financial manager only. There are

different parties interested in the ratio analysis for knowing the financial position of a firm for

different purposes. Various accounting ratios can be classified as follows:

1. Traditional Classification

2. Functional Classification

3. Significance ratios

1.Traditional Classification

It includes the following.

• Balance sheet (or) position statement ratio: They deal with the

relationship between two balance sheet items, e.g. the ratio of current assets to current liabilities

etc., both the items must, however, pertain to the same balance sheet.

• Profit & loss account (or) revenue statement ratios: These ratios deal with the relationship

between two profit & loss account items, e.g. the ratio of gross profit to sales etc.,



• Composite (or) inter statement ratios: These ratios exhibit the relation between a profit &

loss account or income statement item and a balance sheet items, e.g. stock turnover ratio, or the

ratio of total

assets to sales.

2. Functional Classification

These include liquidity ratios, long term solvency and leverage ratios, activity ratios and

profitability ratios.

3. Significance ratios

Some ratios are important than others and the firm may classify them as primary

and secondary ratios. The primary ratio is one, which is of the prime importance to a concern.

The other ratios that support the primary ratio are called secondary ratios.

IN THE VIEW OF FUNCTIONAL CLASSIFICATION THE RATIOS ARE

1. Liquidity ratio

2. Leverage ratio

3. Activity ratio

4. Profitability ratio



1. LIQUIDITY RATIOS

Liquidity refers to the ability of a concern to meet its current obligations as & when

there becomes due. The short term obligations of a firm can be met only when there are

sufficient liquid assets. The short term obligations are met by realizing amounts from current,

floating (or) circulating assets The current assets should either be calculated liquid (or) near

liquidity. They should be convertible into cash for paying obligations of short term nature. The

sufficiency (or) insufficiency of current assets should be assessed by comparing them with short-

term current liabilities. If current assets can pay off current liabilities, then liquidity position will

be satisfactory.

To measure the liquidity of a firm the following ratios can be calculated

• Current ratio

• Quick (or) Acid-test (or) Liquid ratio

• Absolute liquid ratio (or) Cash position ratio



(a) CURRENT RATIO:

Current ratio may be defined as the relationship between current assets and

current liabilities. This ratio also known as Working capital ratio is a measure of general liquidity

and is most widely used to make the analysis of a short-term financial position (or) liquidity of a

firm

Components of current ratio;

Current assets Current liabilities

Cash in hand/at bank Bank OD

Debtors Creditors

Bills receivables Bills payables

Investment(short-term) Short-term advances

Working progress Dividend payables

Marketable securities Income tax payables

Prepaid expenses Out standings /occurred expenses


Current ratio = current assets /current liabilities


Inventory

CURRENT ASSETS

(b) QUICK RATIO

Quick ratio is a test of liquidity than the current ratio. The term liquidity refers to

the ability of a firm to pay its short-term obligations as &when they become due. Quick ratio

may be defined as the relationship between quick or liquid assets and current liabilities. An asset

is said to be liquid if it is converted into cash with in a short period without loss of value

Components of quick ratio

Quick assets Current liabilities

Cash in hand Bank OD

Cash at bank Creditors

Bills receivables Bills payables


Quick ratio = quick or liquid assets/current liabilities


Sundry debtors Short-term advances

Marketable securities Dividend payables

Temporary investments Income tax payables

Out standings /occurred expenses

(c) ABSOLUTE QUICK RATIO:

Although receivable, debtors and bills receivable are generally more liquid than inventories, yet

there may be doubts regarding their realization into cash immediately or in time. Hence, absolute

liquid ratio should also be calculated together with current ratio and quick ratio so as to exclude

even receivables from the current assets and find out the absolute liquid assets.

Absolute liquid assets include cash in hand etc. The acceptable forms for this ratio is 50% (or)

0.5:1 (or) 1:2 i.e., Rs.1 worth absolute liquid assets are considered to pay Rs.2 worth current

liabilities in time as all the creditors are nor accepted to demand cash at the same time and then

cash may also be realized from debtors and inventories

Components of absolute ratio


Absolute ratio=absolute liquid assets / current liabilities


Absolute quick assets Current liabilities

cash in hand Bank OD

Cash at bank Creditors

Interest in fixed assets Bills payables

Short-term advances

Dividend payables

Out standings /occurred expenses

1. LEVERAGE RATIOS

The leverage or solvency ratio refers to the ability of a concern to meet its long

term obligations. Accordingly, long term solvency ratios indicate firm’s ability to meet the fixed

interest and costs and repayment schedules associated with its long term borrowings.

The following ratio serves the purpose of determining the Solvency of the concern.

(a) PROPRIETARY RATIO

A variant to the debt-equity ratio is the proprietary ratio which is also known as

equity ratio. This ratio establishes relationship between share holder’s funds to total assets of the

firm


Proprietary ratio =share holders fund/total assets


Components of proprietary ratio;

2. ACTIVITY RATIOS

Funds are invested in various assets in business to make sales and earn profits. The

efficiency with which assets are managed directly effect the volume of sales. Activity ratios

measure the efficiency (or) effectiveness with which a firm manages its resources (or) assets.

These ratios are also called “Turn over ratios” because they indicate the speed with which assets

are converted or turned over into sales.

• Working capital turnover ratio

• Fixed assets turnover ratio

• Capital turnover ratio

• Current assets to fixed assets ratio

(a) WORKING CAPITAL TURNOVER RATIO


Share holders’ funds Total assets

Share capital Current assets

Reserve surplus Fixed assets

Working capital turnover ratio = sales /working capital

Working capital = current assets –current liabilities


Working capital of a concern is directly related to sales.

It indicates the velocity of the utilization of net working capital. This indicates the

no. of times the working capital is turned over in the course of a year. A higher ratio indicates

efficient utilization of working capital and a lower ratio indicates inefficient utilization.

(B) FIXED ASSETS TURNOVER RATIO

It is also known as sales to fixed assets ratio. This ratio measures the efficiency and

profit earning capacity of the firm. Higher the ratio, greater is the intensive utilization of fixed

assets. Lower ratio means under-utilization of fixed assets

COST OF SALES =INCOME FROM SERVIES

NET FIXED ASSETS =FIXED ASSETS-DEPR

(C)CAPITAL TURNOVER RATIOS

Sometimes the efficiency and effectiveness of the operations are judged by comparing the

cost of sales or sales with amount of capital invested in the business and not with assets held in

the business, though in both cases the same result is expected. Capital invested in the business

maybe classified as long-term and short-term capital or as fixed capital and working capital or

Owned Capital and Loaned Capital. All Capital Turnovers are calculated to study the uses of

various types of capita


FIXED ASSETS TURNOVER RATIO =COST OF SALES /NET FIXED ASSETS

CAPITAL TURNOVER RAIO=COST OF GOODS SOLD /CAPITAL EMPLOYED


COST OF GOODS SOLD=INCOME FROM SERVIES

CAPITAL EMPLOYED =CAPITAL +RESERVER&SURPLUS

(D) CURRENT ASSETS TO FIXED ASSETS

This ratio differs from industry to industry. The increase in the ratio means that trading is

slack or mechanization has been used. A decline in the ratio means that debtors and stocks

are increased too much or fixed assets are more intensively used. If current assets increase

with the corresponding increase in profit, it will show that the business is expanding

Components of current assets to fixed assets

Current assets Fixed assets

Cash in hand/at bank plant

Debtors Machinery

Bills receivables Good will

Investment(short-term) Patents

Working progress Furniture

Marketable securities Buildings

Prepaid expenses Fittings and equipment

Inventory Vehicles and aircraft


CURRENT ASSETS TO FIXED ASSETS=Current assets/Current liabilities


3. PROFITABILITY RATIOS

The primary objectives of business undertaking are to earn profits. Because profit is the engine,

that drives the business enterprise.

• Net profit ratio

• Return on total assets

• Reserves and surplus to capital ratio

• Earnings per share

• Operating profit ratio

• Price – earnings ratio

• Return on investments

Gross profit

(a) NET PROFIT RATIO

Net profit ratio establishes a relationship between net profit(after tax) and sales and

indicates the efficiency of the management in manufacturing, selling administrative and other

activities of the firm


NET PROFIT RATIO=NET PROFIT AFTER TAX / NET SALES


Net Profit after Tax = Net Profit (–) Depreciation (–) Interest (–) Income Tax

Net Sales = Income from Services

It also indicates the firm’s capacity to face adverse economic conditions such as

price competitors, low demand etc. Obviously higher the ratio, the better is the profitability.

(B) RETURN ON TOTAL ASSETS

Profitability can be measured in terms of relationship between net profit and

assets. This ratio is also known as profit-to-assets ratio. It measures the profitability of

investments. The overall profitability can be known

NET PROFIT = EARING BEFORE INETERST AND TAXS.

TOTAL ASSETS = FA+CA

(b) RESERVES AND SURPLUS TO CAPITAL RATIO

It reveals the policy pursued by the company with regard to growth shares. A very

high ratio indicates a conservative dividend policy and increased ploughing back to profit.

Higher the ratio better will be the position.

(c) EARNINGS PER SHARE


RETURN ON TOTAL ASSETS=NET PROFIT/TOTAL ASSETS

RESERVES AND SURPLUS TO CAPITAL RATIO=RESERVES &SURPLUS/CAPITAL


Earnings per share is a small verification of return of equity and is calculated by

dividing the net profits earned by the company and those profits after taxes and preference

dividend by total no. of equity shares.

The Earnings per share is a good measure of profitability when compared with EPS of similar

other components (or) companies, it gives a view of the comparative earnings of a firm.

(f

) PRICE - EARNING RATIO

Price earnings ratio is the ratio between market price per equity share and earnings

per share. The ratio is calculated to make an estimate of appreciation in the value of a share of a

company and is widely used by investors to decide whether (or) not to buy shares in a particular

company.

Generally, higher the price-earning ratio, the better it is. If the price earning ratio

falls, the management should look into the causes that have resulted into the fall of the ratio.

(g) RETURN ON INVESTMENTS:


EARNING PER SHARE=NET PROFIT AFTER TAX/ NUM OF EQUITY SHARES

Price earning ratio= market price per share/earning per share

Market price per share= capital + reserves & surplus/number of equity shares

Earnings per share = earnings before interest and tax/number of equity shares


Return on share holder’s investment, popularly known as Return on investments

(or) return on share holders or proprietor’s funds is the relationship between net profit (after

interest and tax) and the proprietor’s funds.

The ratio is generally calculated as percentages by multiplying the above with 100

DATA ANALYSIS AND INTERPRETATION

The following are some of the ratios that have been used in this for analyzing the company

performance with particular reference to “Ashok Leyland limited”

LIQUIDITY RATIOS :

The liquidity of a business firm is measured by its ability to satisfy its short – term obligations

as they come due. Liquidity refers to the solvency of the firm’s over all financial position the

case with which it can pay its bills

1) Current ratio:

The current ratio is one of the most commonly cited financial ratios, measures of the

firm’s ability to meet its short-term obligations. (It Also known as "liquidity ratio", "cash

asset ratio" and "cash ratio".)

It is calculated as follows

Current ratio= current assets / current liabilities

(Rs in Millions)


RETURN ON SHARE HOLDER’S INVESTMETNS=NET PROFIT (AFTER INTEREST AND TAX)/SHAREHOLDER’S FUNDS


Years Current assets Current liabilities Ratio in %

2007-08 22,324.13 14,085.16 1.58

2008-09 26,977.14 17,558.55 1.53

2009-10 28,752.56 22,719.40 1.26

2010-11 31,656.15 21,369.45 1.48

2011-12 41,396.84 29,607.57 1.39

Note :

An ideal current ratio is 2:1.

A firm having a seasonal trading activity may show a lower or higher current ration at a

certain period of the year .so, it does not possible to maintain ideal ratio.

The current ratio can also be manipulated very easily

Chart-1



.

Interpretation:

The ideal current ratio is 2:1.

The industry average ratio is 1.55.

Current ratio of the company was 1.58 in the year 2008. It is the highest ratio in the entire

study period.

The rest of four year from 2009 to 2012, the current ratio is fluctuating.

The overall performance of the company is not satisfactory because the company is not

maintaining idle ratio.

2) QUICK RATIO( Acid test ratio):

An indicator of a company's short-term liquidity. The quick ratio measures a

company's ability to meet its short-term obligations with its most liquid assets. The

higher the quick ratio, the better the position of the company.

The quick ratio as follows.

Quick ratio= quick assets-inventories /current liabilities.

(Rs in Million)



Years Quick assets Current liabilities Ratio in %

2007-08 13,298.52 14,085.16 0.94

2008-09 16,270.93 17,558.55 0.92

2009-10 16,513.43 22,719.40 0.72

2010-11 18,356.16 21,369.45 0.85

2011-12 25,014.44 29,607.57 0.84

Note :

The quick ratio is more conservative than the current ratio, a more well-known liquidity

measure, because it excludes inventory from current assets.

The ratio is also an indicator of short-term solvency of the company.

Chart-2



Interpretation:

In the year 2008 the quick ratio was high and 2010 the ratio is very low and again in the

year 2011 and 2012 was increased.

The standard of quick ratio is 1:1 and the company should not maintain the ideal ratio.

The company not able to meet current obligations .it can interpreted based on the

previous ratio.

3) ABSOLUTE QUICK RATIO:



The absolute quick rtio is represented by cash and near cash items. It is a ratio of absolute

liquid assets to current liabilities. In the computation of this ratio only the absolute liquid

assets are compared with the liquid liabilities

Absolute quick ratio=quick assets/current liabilities.

(Rs in Millions)

Years Absolute Quick

assets

Current liabilities Ratio in %

2007-08 6,081.32 14,085.16 0.43

2008-09 4,531.41 17,558.55 0.247

2009-10 4,533.01 22,719.40 0.19

2010-11 985.766 21,369.45 0.046

2011-12 5,926.81 29,609.52 0.20

Note:

Ideal ratio of absolute ratio is 0.5:1.

This ratio is ascertained by comparing the liquid assets (i.e., assets which are

immediately convertible into cash without much loss)

Chart-3



Interpretation:

Absolute ratio of the company was 0.43 in the year 2008. And the rest of the following

years the ratio is fluctuating .and in 2011 the ratio has decreased to 0.046 .

The company is not maintaining proper liquidity assets to meet current obligations.

LEVERAGE RATIO :

1) PROPRIETOR RATIO



proprietary ratio establishes relationship between proprietors fund and tangible assets.

This ratio is also termed as ‘net worth to assets or assets ratio. It may expressed as

Proprietors ratio or equity ratio=shareholders funds/total assets.

(Rs in Millions)

Years Shareholders’ funds Total assets Ratio in %

2007-08 14,124.53 36,860.79 0.38

2008-09 18,945.68 44,633.32 0.42

2009-10 21,489.82 55,399.59 0.38

2010-11 34,738.99 78,265.78 0.44

2011-12 36,687.58 92,768.68 0.39

Note:

A high proprietary ratio will indicate a relatively little danger to the creditors, etc., in the

event of forced reorganization or winding up of the company.

A ratio below 50% alarming for the creditors since they may have to lose heavily in the

event of the company’s liquidation on account of heavy losses.

Chart -4

(Rs in Millions )



Interpretation:

In the year 2008 the proprietary ratio was 0.38 but in the next year 2009 , it increased to

0.42 and again in the year 2010 it come down to 0.38 and it increased to 0.44 in next year

and the following year 2012 ratio was fell down to 0.39.

It can analyses that the proprietary ratio has fluctuating.



ACTIVITY RATIO:

1) WORKING CAPITAL TURNOVER RATIO:

It indicates the velocity of the utilization of net working capital. This indicates the

no. of times the working capital is turned over in the course of a year. The ratio is calculated as

follows.

Working capital turnover ratio = sales/working capital

(Rs in Millions)

YEARS Sales WORKING CAPITAL RATIO

2007-08 52,476.57 8,238.97 6.36

2008-09 71,681.76 9,418.59 7.61

2009-10 77,291.23 6,033.16 12.81

2010-11 59,810.73 10,286.69 5.81

2011-12 72,447.10 11,789.27 6.14

Note:

A company's efficiency, financial strength and cash-flow health show in its management

of working capital.

CHART-5



Interpretation :

A high working capital turnover ratio may be the result of favourable turnover of

inventories and receivables. The low working capital turnover ratio indicates the

efficient utilization of working capital.

Working capital turnover ratio of the company was 6.36 in the year 2008 and it

had been increasing till the 2009,and in next the ratio was slow down to 5.81,and

in the year 2012 the ratio again increased to 6.14.

In the 2009 the working capital ratio was very high, compare to rest of the years.



2) FIXED ASSETS TURNOVER RATIO:

This ratio indicates the extent to which the investments in fixed assets contribute towards

sales. If compared with a previous period, it indicates whether the investments in fixed

assets has been judicious or not. The ratio is calculated as follows:

Fixed assets turnover ratio = Cost of sales / net fixed assets

(Rs in Millions)

Years Cost of sales Net fixed assets Ratio

2007-08 46,720.36 9,423.71 4.95

2008-09 65,281.07 13,070.33 4.99

2009-10 69,210.63 15,255.50 4.53

2010-11 55,427.74 33,991.16 1.63

2011-12 64,937.72 42,495.59 1.64

NOTE:

The fixed assets turnover can further be divided into turnover of each item of fixed assets

to find out the extent each fixed assets has been properly used. For example

- plant and machinery to turnover

- land and buildings to turnover



Chart-6

Interpretation:

In the year 2008 the fixed assets turnover ratio was 4.95, and rest of the following

year the ratio was slow down like 4.95, 4.53, 1.63, 1.64.

The overall performance of fixed assets turnover ratio of the company is not

satisfactory up to the year 2012.

The company following straight line method so net fixed assets was decreased.



2) CAPITAL TURNOVER RATIO:

Sometimes the efficiency and effectiveness of the operations are judged by comparing

the cost of sales or sales with amount of capital invested in the business and not with

assets held in the business, though in both cases the same result is expected. Capital

invested in the business maybe classified as long-term and short-term capital or as fixed

capital and working capital or Owned Capital and Loaned Capital. All Capital Turnovers

are calculated to study the uses of various types of capita

Capital turnover ratio = cost of goods sold/capital employed.

(Rs in Millions)

Years Cost of goods sold Capital employed Ratio

2007-08 43,830.63 14,124.53 3.10

2008-09 61,623.23 18,945.68 3.25

2009-10 65,289.69 21,489.82 3.03

2010-11 51,745.71 34,738.99 1.48

2011-12 60,176.82 36,687.58 1.64



Chart-7

Interpretation:

The capital turnover ratio was very high in the year 2009.

Capital turnover of the company was 3.10 in the year 2008 and next following year

the ratio had increased to 3.25 and the ratio came to down to 1.48 in the year 2011

and again has increased .



3)CURRENT ASSETS TO FIXED ASSETS:

This ratio differs from industry to industry. The increase in the ratio means that trading is

slack or mechanization has been used. A decline in the ratio means that debtors and stocks

are increased too much or fixed assets are more intensively used. If current assets increase

with the corresponding increase in profit, it will show that the business is expanding

Current assets to fixed assets = current assets/fixed assets

(Rs in Millions)

Years Current assets Fixed assets Ratio

2007-08 22,324.13 14,528.66 1.53

2008-09 26,977.14 17,656.18 1.52

2009-10 28,752.56 26,646.95 1.07

2010-11 31,656.15 46,609.62 0.69

2011-12 41,396.84 51,371.83 0.80



Chart-8

Interpretation:

This is ratio expressed relationship between current asset to fixed assets.

In the year 2008 the percentage of ratio was very high compare to rest of the years.

Current assets to fixed assets ratio of the company was 1.53 in the year 2008 and

1.52 in the year 2009.it is gradually degreased in the year 2010-12.



PROFITABILITY RATIO

1)Gross profit ratio:

This ratio expresses relationship between gross profit and net sales. Its formula is

Gross profit = gross profit/net sales *100

(Rs in Millions )

Years Gross profit Net sales Ratio*100

2007-08 5400.70 52476.57 10.29 (0.1029)

2008-09 7026.85 71681.76 9.8 (0.098)

2009-10 8039.89 77291.23 10 (0.10)

2010-11 4694.35 59810.73 7.8 (0.078)

2011-12 7628.39 72.447.10 10.5 (0.105)



Chart-9

Interpretation:

The ratio has multiple with 100.

In the year 2012 gross profit is very high because of sale is more.

In the year 2011 the gross sales is high.

In the year 2011 the gross profit is low and the rest of the year 2008, 2009,2010

the profit had fluctuating .

The Company lost 1.8 percentage market share in the Indian medium and heavy

commercial vehicle market during the financial year 2010-11, mainly due to loss

of sales in the truck segment.



2)NET PROFIT:

This ratio indicate net margin earned on a sales of Rs.100.it is calculated as follows

Net profit=net profit(AIT)/net sales*100

(Rs in Millions)

YEARS NET PROFIT NET SALES RATIO*100

2007-08 3,273.20 52,476.57 6.2(0.062)

2008-09 4,412.86 71,681.76 6.1(0.061)

2009-10 4,693.10 77,291.23 6.0(0.060)

2010-11 1,899.963 59,810.739 3.1(0.031)

2011-12 4,236.748 72,447.105 5.8(0.058)



Chart-10

Interpretation:

Net profit ratio of the company was 0.62(6.20) in the year 2008. It is the

highest ratio in the entire study period.



In the year 2009 the net profit was 4,412(Millions),it was highest profit

compare to the rest of the years.

From 2008 to 2011 the net profit ratio is continually decreased like 6.2 (2008),

6.1 (2009),6.0 (2010), 3.1(2011) and the end of the year 2012 the net ratio

again hiked to 5.8.

3)RETURN ON TOTAL ASSETS:

It measures the overall effectiveness of management in generating profits with its

available assets, also called return on investment.

Return on total assets = net profit (BIT) / total assets*100

(Rs in Millions)

YEARS NET

PROFIT(AIT)

TOTAL ASSETS RATIO*100

2007-08 3,273.20 36,830.79 8.8(0.088)

2008-09 4,412.86 44,633.32 9.8(0.098)

2009-10 4,693.10 55,399.51 8.4(0.084)

2010-11 1,899.963 78,265.78 2.4(0.024)

2011-12 4,236.748 92,768.68 4.5(0.045)

Note:



Return on total assets, can be computed in three types.

Net profit after tax / total *100

Net profit after tax + interest / total assets *100

Net profit after tax + interest / total assets excluding fictitious assets * 100

Chart -11

Interpretation:



The return on total assets of the company in year 2008 is 8.8 ,in the year 2009 is 9.8 but

in the year 2010 the ratio is slow down to 8.4.

Over all study of the return on total assets of the company is fluctuating.

4) RESERVE & SURPLUS TO TOTAL CAPITAL:

It reveals the policy pursued by the company with regard to growth shares. A very high

ratio indicates a conservative dividend policy and increased plugging back to profit.

Higher the ratio better will be the position.

Reserve & Surplus to total capital = reserve & surplus /capital

(Rs in Millions)

YEARS RESERVE &

SURPLUS

CAPITAL RATIO

2007-08 12,902.94 1,221.59 10.56

2008-09 17,621.81 1,323.87 13.31



2009-10 20,159.48 1,330.34 15.15

2010-11 33,408.64 1,330.342 25.11

2011-12 35,357.23 1,330.342 26.57

Chart-12

Interpretation :



This is ratio expressed relationship between reserve& surplus to capital.

The ratio has continuously increasing.

In the year 2008 the ratio was 10.56 and the following years are 13.13(2009),

15.15(2010), 25.11(2011), and 26.57(2012).

The overall performance of the company is satisfactory because the company

performed well.

5)EARNINGS PER-SHARE:

In order to avoid confusion on account of the varied meaning of the term capital

employed , the overall profitability can also be judged by calculating earning per

share with help of the following formula.

Earnings per-share = net profit (AIT) / no. of equity shares

YEARS NET PROFIT(AIT) NO. OF EQUITY

SHARE

RATIO

2007-08 3,273.20 1192.92 2.74

2008-09 4,412.86 1303.89 3.38

2009-10 4,693.10 1328.59 3.53



2010-11 1,899.963 1330.33 1.42

2011-12 4,236.748 1330.33 3.18

Note:

The earning per share helps in determining the market price of the equity shares of the

company.

It is also estimating the company’s capacity to pay divided to its equity shareholders.

Chart -13



Interpretation :

The company has following weighted average method while calculating

earning per share.

In my observation last three year the company has issued same no of share .

In the year 2010 the ratio was 3.53.it is the highest ratio in the entire study

period.

The company has performance well in satisfactory of earning per share.

6)PRICE-EARNING RATIO:

This ratio indicates the number of times the earning per share is covered by its market

price. This is calculated according to the following formula:

Price earning ratio = Market price per share/no. of equity shares

(Rs in millions)

YEARS MERKET PRICE

PER SHARE

NO. OF EQUITY

SHARES

RATIO

2007-08 11.84 3.79 3.12

2008-09 14.53 4.63 3.13

2009-10 16.17 4.80 3.36



2010-11 26.11 1.56 16.73

2011-12 27.57 4.09 6.74

NOTE:

Price earning ratio helps the investor in deciding whether to buy or not to buy

the share of a company at a particular market price.

Chart-14



Interpretation :

The price-earnings ratio of the company was 3.12 in the year 2008, the price

earning ratio is gradually increasing .those ratio are consequently 3.12, 3.13,

3.36, 16.73 and the end of the year the company’s price earning ratio slow

down to 6.74.

The company is maintaining the sufficient ratio,it shows the investor to invest

their investments.

The overall price earning ratio position of the company is satisfactory up to

the year 2011 and in the year 2012 the ratio has come down.



7)RETURN ON INVESTMENT:

Return on share holder’s investment, popularly known as Return on investments (or)

return on share holders or proprietor’s funds is the relationship between net profit

(after interest and tax) and the proprietor’s funds

Return on investment = net profit (AIT) / Share holders funds

YEARS NET

PROFIT(AIT0

SHARE

HOLDERS FUND

RATIO*100

2007-08 3,273.20 14,124.53 23 (0.23)

2008-09 4,412.86 18,945.68 23 (0.23)

2009-10 4,693.10 21,489.82 21 (0.21)

2010-11 1,899.963 34,738.99 5.4 (0.054)

2011-12 4,236.748 36,687.58 11.5(0.115)



Chart-15

Interpretation:

The return on investment of the company was 23 in the year 2008 and the

return on investment ratio is gradually degreasing ,those ratio are 23, 23, 21,

5.4, and 11.5.

In the year 2008 and 2009 the ratio was 23 , it is highest ratio in my entire

study period.

The overall performance of the company is not satisfactory because company

is not maintaining proper idle ratio.

FINDINGS:



The current ratio of the firm is not maintaining standard i.e. 2:1 in selecting

period. So it indicates the idle funds and inefficient utilization of funds and

indicates the weak position of the firm.

The company’s current ratio maintaining average ratio 1:5.

The quick ratio of the company is also not at all supporting standard norm i.e.

1:1. So it indicates inefficient utilization of the company funds.

In case of proprietor ratio the company could not maintain the optimum level

of the ratio. It is fluctuating.

The company maintained the efficient reserve and surplus throughout my

study analysis.

The company is maintaining weighted average method while calculating

earnings per share.

The return on investment ratio has continuously degreasing .

Gross profit of the company is fluctuating.

Net profit of the company is continuously degreasing trend in my analyses.

The company is maintaining fixed assets & current assets in proper manner.

SUGGESTIONS:



It is suggested that the company should maintain required level of current assets

ratio.

It is suggested that the company should maintain standard norm then only it can

enhance the maximum profits.

It is suggested that the company should maintain optimum level of proprietor

ratio.

Sales are very important to every organization to sustain the growth , so company

should try to control the cost of goods sold.

They have to go in for advertisement and sales promotion policy.

The company profit has fluctuating so better to take strategic decisions, it must be

made for the profit to increase.

Funds are utilizing in proper manner.

The company is following straight line method in depreciation so better to adopt

diminishing method.

Earnings per share value is continuously fluctuating trend so the must be maintain

increasing trend.

CONCLUSION:



This study on financial performance of “ASHOK LEYLAND LIMITED” has proved to be

extremely useful for the company to evaluate its financial position. The study has brought the

problem in maintaining constant liquidity of the firm and the working capital which has to be

improved to avoid financial crunch. In the future, the study was extremely useful in identifying

the major areas of concern affecting the financial of the firm.

The study was also extremely useful for the researcher it gave several opportunities to learn

the financial process of the company. It was a learning experience for the researcher as the study

acted as a bridge to apply theory with practical application.

The study could be used as base for future studies in this area. The financial analysis is the

powerful mechanism of determining financial strength & weakness of the firm. The financial

performance of the “ASHOK LEYLAND LIMITED “ is good.



Bibliography :

Books:

Cost & Management accounting by Dr.S.N Majeswari .

F inancial Management by prof.I.M Pandey, Prof.Emeritus,IIMA.

Financial accounting by T.S Reddy and A.Murthy

Web sites:

www.google.com

www.wikipedia.com

www.investopedia.com

www.accountingformanagement.com


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ratio analysis - ashokleyland sudheer

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